Believe in ghosts

China, we are constantly told by know-it-all critics on Wall Street, is a giant bubble waiting to burst. Just go to any Chinese city and the evidence is apparent in thousands of empty apartment blocks and ill-conceived government megaprojects.

The ultimate symbols of investment gone mad are China’s “ghost towns” – gleaming new cities without inhabitants. Nouriel Roubini, the gloomy critic of excessive consumption and dodgy lending practices in the West, recently cited the proliferation of empty cities as evidence that China was heading for its own financial crisis and years of anemic, Japan-style growth.

The trouble with this analysis is that it ignores the reality on the ground. Urbanization pressures, housing demand, and prior experience suggest that China’s so-called “ghost towns” will not remain empty for long. Sure, there are plenty of problems with China’s investment model – but building ahead to satisfy future demand for millions of new homes is not one of them.

The poster child for critics who argue that China’s building boom has become unmoored from reality is Ordos, a municipality in Inner Mongolia where local officials have built an empty city in the middle of the Gobi Desert. Almost all the 100,000 apartments have been snapped up by local investors, but 90% remain empty. Ordos appears to be a classic example of investment racing far ahead of demand.

Yet Ordos, which claims to sit on one-sixth of the nation’s coal deposits, is anything but representative. Flush with coal money, Ordos can afford to flash its cash on risky investment projects. If its gamble fails, developers and investors will lick their wounds and move on; any impact on China’s property market will be miniscule.

Meeting real needs

The vast majority of China’s “ghost towns” are new districts built on the edges of expanding cities, not mini-Dubais in the desert. And these new suburbs are prepared to serve multiple sources of new demand; both providing much-needed housing for people relocating from older, smaller homes in the city center, and housing rural migrants looking for cheap housing closer to the industrial zones on the urban outskirts.

In larger cities, they also provide space for new campuses to house China’s exploding university population. Take Zhengzhou, the capital of Henan province, which has been criticized for building a huge new district on its eastern edge. Zhengzhou’s student population quadrupled to more than 600,000 over the past decade, and its new urban district will soon house 250,000 students and teachers in 15 new campuses.

Inevitably, new urban districts will not fill up immediately after they are built. It takes time to attract a critical mass of inhabitants. But China’s cities need to absorb 20 million new urbanites every year in a country that already has an estimated shortfall of 75 million housing units. Most “ghost towns” are merely new suburbs that people have not moved into yet.

Pointing at a handful of empty urban districts as evidence of a giant property bubble ignores the reality that China has a huge and growing demand for new housing. Almost every major city in China contains a thriving neighborhood that was once empty. China’s cities must build ahead to accommodate millions of new urbanites, and it makes sense to house them in new districts, rather than hope that congested old neighborhoods can bear the strain.

Of course, plenty of ill-conceived projects will fail along the way, and some developers and investors will lose money. China’s urbanization process is riddled with inefficiency and waste. But, in time, The country’s empty cities will fill up – just as Shanghai’s Pudong district, once the biggest ghost town of them all, filled up over the past decade.

Fat Dragon is China Economic Review’s house pundit on the Chinese political economy

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